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The following information is strictly confidential, is to remain in-house at Nedbank Group, is for in-house purposes only, and may not be disseminated to outsiders.Attendees and staff members are reminded that they are legally bound by all constraints imposed upon them in regard to privacy of Bank information whether in terms of their contracts of employment including the declaration of secrecy, and/or any and all codes and policies relating to conduct, including those restrictive as to share dealings, and in particular insider trading.
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Nedbank and the Mzansi Initiative in South Africa
Access Conference – Cartagena 2009
Presented by: Bryan McLachlan
Nedbank and the Mzansi Initiative in South Africa
Access Conference – Cartagena 2009
Presented by: Bryan McLachlan
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Contents
Background to the South African Market
Banking industry rationale for Mzansi
Background to Nedbank
The Mzansi journey for Nedbank
The impact of Mzansi on the South African banking market
Future focus areas for Mzansi
Considerations for banks
Considerations for regulators
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South Africa is a beautiful country…
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The hosts for the 2010 FIFA World Cup…
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And the wealthiest country in Africa.
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Unfortunately, like much of Latin America…
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There is a wide distribution of wealth…
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And not everyone lives in the same conditions…
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The early 1990’s was a time of immense change and transformation in South Africa
Apartheid ended as a system, and apartheid laws were repealed.
Every adult was able to vote for the first time.
Nelson Mandela became South Africa’s first democratically elected, and black, President.
Nelson Mandela and F W de Klerk were awarded the Nobel Peace Prize for guiding South Africa through a peaceful transition.
A new, and very progressive, constitution was written.
South Africa is a very diverse country in terms of race, culture and religion – South Africans say a “Rainbow Nation” was born.
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However a decade later, in 2003, greater support for the transformation of the country was required from the banking sector:
D. Porteous; ‘The landscape of access to financial services in South Africa’ SARB: Labour Markets & Social Frontiers April 2003
AMPS 2003o Banked 38%
o Unbanked 62%
Finscope 2003o Currently Banked 51%
o Unbanked 49%
International benchmarks 2003 (banked percentage):o USA 90%
o Brazil 35% (household basis)
o Kenya 5.9%
• NOTE: Difference in unbanked percentage is driven by difference in definition of adults (16+ or 18+), and definition of banked and unbanked. Finscope considers the ‘previously banked’ as unbanked.
• NOTE: Difference in unbanked percentage is driven by difference in definition of adults (16+ or 18+), and definition of banked and unbanked. Finscope considers the ‘previously banked’ as unbanked.
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And the legacy of apartheid was still apparent with the demographic profile of the unbanked predominantly black…
57
43
72
53
43
12
43
57
28
47
57
88
0% 20% 40% 60% 80% 100%
Female
Male
Black
Coloured
Indian
White
Unbanked Banked
Source: FinScope 2003
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The relationship between social issues and being unbanked:
38%
35%
39%
27%
70%
91%
41%
52%
42%
41%
42%
32%
63%
89%
45%
52%
Gone Without Enough Food To Eat
Felt Unsafe From Crime In Own
Home
Gone Without Medicine/Treatment
Gone Without Cash Income
Gone Without Clean Water To Drink
Gone Without Shelter
Gone Without Electricity In Home
Gone Without Fuel To Heat Home
Never Banked Previously Banked
Percentage that said ‘Never’In the last 12 months, how often has your family ……?
Source: FinScope 2003
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Leaders of the 4 largest banks decided to proactively transform the industry and pre-empt possible regulation.
4 largest banks in South Africa have +- 90% market share.
Worked with Government to devise the Financial Services Charter:o Charters have their origin in the Constitution and their objective is to achieve social and economic
equity by redressing inequities that exist in the country
o The development of the Charter was of a collaborative nature and was voluntarily developed by the financial sector in order to have effective transformation occuring.
The Charter covers six areas:
o Equity Ownership,
o Human Resources,
o Access to Financial Services,
o Procurement,
o Corporate Social Investment (CSI), &
o Empowerment Financing.
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Access was defined by distribution and development of an appropriate transactional and savings product:
80 % of the population should be within: o 20 km of first order services (open accounts, queries, transactions).
o 10 km of transactional services where they can access cash (ATM, Cash-back at POS)
Suitable product be developed: > 60% of the South African adult population to be banked by 2008:
Post Bank, a parastatal owned by the Post Office, joined the Access initiative by offering the Mzansi account.
It was calculated that 2.2 million new active accounts would need to be sold and each bank was given a target in proportion to their market share.o Nedbank’s target, at 18% was 391,000
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Key features of
Access to all banks’ ATM’s for the same price (no surcharge for other banks’ ATMs)
Must pay interest to encourage savings
Simple pricing and terminology
National brand to be used by all banks, and logo to appear on all cards (banks contributed equally to advertising expenses to launch the producto R12,000,000 (+- US$ 1,600,000) or +- US$ 400,000 each.
A defined basket of transactions (2 cash deposits, 2 ATM withdrawals, 1 electronic transfer, 1 balance enquiry) to cost less than 1 % of the average monthly income of South Africans.o At launch average monthly income was R1,500 (+- US$ 200) therefore cost to be less than R15
o No monthly maintenance fees allowed
To prevent keep costs low and minimise cannibalisation from other products:o No monthly statements
o Transactions were limited to 6 per month. Thereafter a fee of R10 per transaction was payable.
o No debit orders (standing instructions) were allowed on the account. This was subsequently amended in 2006.
“Know Your Customer” and “Money Laundering Controls” were impractical in remote rural areas or in informal settlements. o Regulators created an exemption on condition no transaction on the account exceeds R5,000
(+- US$ 666) and total transactions cannot exceed R20,000 (+- US$ 2,666) in a month. Accounts need to be automatically frozen if the thresholds are exceeded.
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Nedbank in 2003:
Traditionally in the affluent market only
+- 18% market share by value but didn’t have sufficient volume to sustain the infrastructure
Had a multi-brand strategy with a small brand (People’s Bank) operating in the mass market and a joint venture with the parent company (Old Mutual Bank)
Almost failed in 2003o Bailed out by parent company (Old Mutual PLC) through a R 5 billion rights issue (+- US$
666,666,666)
Branches and ATM’s were concentrated in affluent areas:Affluent Mass % Mass
Branches 585 15 2.6%
(3 Nedbank, 12 Peoples Bank)
ATMs 1186 71 6%
(32 Nedbank, 39 Peoples Bank)
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Mzansi launched in October 2004. By December 2004 Nedbank was on 7% market share…
Only sold 24,000 accounts, despite the high profile launch (industry sales: 313,000)
Strategic decision taken to target the mass marketo Build volume to leverage underutilised infrastructure
o Gain credibility with government and parastatals in order to attract business
o Gain credibility with black South Africans and become relevant to all South Africans
The strategic decision to refocus included:o Move to a single brand strategy and re-brand all outlets as Nedbank, to give presence in the mass
market and reduce costs
o Set internal target of 850,000 Mzansi accounts by 2008 (more than double the official target)
o Keep the aspirational positioning of the brand but extend it to all markets
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Distribution needed urgent attention:
80% of all new outlets and ATM’s opened in mass market areas
A team was created to engage with local communities and community leaders to get buy-in before any new outlets or ATM’s were introduced to an areao NGO’s played a significant role
o Nedbank gained immense credibility from this approach
More than 15 social upliftment programmes were initiated in the communities
A large investment was made in customer educationo Key focus areas in Curriculum
– Banking & Financial Literarcy – Budgeting & Cash Management– Preservation & Life Planning Education: Death, retirement, funeral, wills– Business plan set up for micro entrepreneurs– NCA requirements & credit education– Alleviation of fear & ignorance - empowerment through access & security
Mediums for consumer education include radio & print as well as community workshops, face to face lectures and videos
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Innovation of physical outlets:
Innovative new outlets:o “Bank in a Box”: prefabricated branch
● Can be moved if the location proves unsuccessful
● Less than 50% of the cost of a traditional branch
o Nedbank in Retailers● In-store branches opened in supermarkets serving this market (currently 50, with plans to roll out a further 50)
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A new mobile sales team was introduced:
Employees drawn from local communities
Now +- 100 teams
Primary tool is a “Boot Kit” which consists of account opening forms, marketing material, desk and gazebo:
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The Nedbank Mzansi product was updated
Cannibalisation was understood and the risk did not materialise
Pricing was tweaked to be best in market
High transaction penalty fee eliminated (Nedbank remains the only bank not to charge this fee)
Debit orders (standing instructions) introduced
Access to internet and mobile banking introducedo Only 0.08% of Mzansi customers bank online, however the just having it available is a selling point as
the Nedbank product is perceived to be superior
Nedbank maintained the service positioning from in this marketo Shorter queues
o Mass affluent service levels, staff training etc
o “Ask Once” (if we fail we will donate R50 to charity)
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And smashed the internal target of 850,000 accounts
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The results of these initiatives is that sales escalated:
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Monthly market share has grown considerably from 7%:
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Nedbank achieved its industry target of 18% of the book…
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Mzansi has been successful for the industry too:
62.7 60.351
7.5 9.611.5
30.137.5
29.8
0
20
40
60
80
100
2008 (n=3900) 2007 (n=3900) 2006 (n=3894)
Currently banked Previously banked Never banked
Source: FinScope 2009
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A new measure which has recently been developed (FSM: Financial Standards Measure) shows significant simultaneous improvement:
19
21.5
15.9
12.8
14.4
15.7
17.7
14.7
11.7
12.5
9.3
7.9
7.4
6.2
3.9
3.2
2.616.9
12.9
12.8 16.1 15.9
14.5
14.3
FSM 1 FSM 2 FSM 3 FSM 4 FSM 5 FSM 6 FSM 7 FSM 8
2007
2008
2006
Source: FinScope 2009
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Is Mzansi a success in every respect:
Mzansi is not yet profitable:o Competitor Standard Bank claims to have spent +- R200,000,000 p.a. (+- US$ 26,666,666)
o However:● In the early years acquisition costs make up a large proportion of costs
● (> 90% in year 1, < 30% in year 5)
● POS (card) and electronic transactions are growing very quickly
Dormancy (inactive accounts) is a big problem:
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Reasons for inactive accounts
Over selling accounts
Abandoned accounts to avoid credit payments
Don’t need an account but want to “belong”o Want an answer to the question: “where do you bank?”
Only use the account to save
Only work part time or occasionally
Recently unemployed
Potential solutions include pre-paid cards, customer education, employee training
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Market redistributio
n zone
Market developmen
t zone
Total marketTotal market
Currently bankedCurrently banked
Currently unbankedCurrently unbanked
Has access to the product but does not use it
Has access to the product but does not use it Potential
usersPotential users
Market enablement
zone
Does not want the productDoes not want the product
Does not have access to the
productDoes not have access to the
product
Too poorOften go
without enough food
Too poorOften go
without enough food
AwarenessNever heard of
MzansiAwareness
Never heard of Mzansi
Can’t affordEarn to little to afford MzansiCan’t affordEarn to little to afford Mzansi
No IDReason no bank
a/cNo ID
Reason no bank a/c
Physical access
Bank attribute – too far away
Physical access
Bank attribute – too far away
No trustReason no bank
a/c No trust
Reason no bank a/c
There are still opportunities for improvement in the banking industry in South Africa…
27,496,578
19,487,315
8,009,263
6,522,890
1,486,373
253,592
1,497,741
3,245,680
116,268
4,086,734
186,952
114,519
1,371,854
Source: FinScope 2009
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What has Nedbank gained from this work:
R 200,000,000 needs to be seen in the context of headline earnings of R 5 billion
As acquisition costs reduce as a percentage, Mzansi is expected to break even on a monthly basis in 2009
Gained knowledge and credibility in a market which Nedbank did not previously service
Nedbank has gained 1,400,000 new customers who are sharing the cost of infrastructure
Approximately 10% of these customers (140,000) now behaving as mainstream banked customers (with accompanying revenue opportunities)
Nedbank has gained credibility with Government and has won a number of important tenders
Nedbank has gained market share of affluent black clients
Nedbank has gained credibility with other stakeholders such as the media, regulators, investors
There have been considerable learning’s which have now been applied to other areas:o Nedbank is rolling out in-retailer outlets to supermarkets serving the mass affluent market
o Mobile sales teams now selling mainstream products such as current accounts, personal loans, insurance, savings
o Applying knowledge of cannibalisation to new funding products and new transaction products
o Able to do lower risk lending of personal loans to customers with Nedbank Mzansi accounts
o Some pilots in the community may lead to greater opportunities
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Considerations for Banks:
This is an expensive initiative, and consumes significant resources, so requires the drive and will of executive management to succeed.
The business case needs to be considered over 10 to 20 years, rather than over traditional timeframes.
This is an opportunity to grown the market organically. In South Africa the banked market grew by approximately 20% by number.
It is sometimes in the interests of all stakeholders for banks to pro-actively support the agenda of the state.
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Considerations for NGO’s and Regulators:
There are significant social benefits to have the population banked as financial transaction costs are lowered.
Fraud and corruption is reduced, if social grants are paid directly into a bank account.
“Know Your Customer” and “Money Laundering Controls” are expensive and sometimes impractical in remote rural areas or in informal settlements. o In South Africa regulators created and exemption on condition no transaction on the account exceeds
R5,000 (+- US$ 666) and total transactions cannot exceed R20,000 (+- US$ 2,666) in a month. Accounts need to be automatically frozen if the thresholds are exceeded.
In South Africa, Competition Law has become much stricter since 2003 (as in many other countries).o The collaboration required to bring Mzansi to market successfully would not have been possible today
in South Africa. An exemption in terms of Competition Law would have needed to have been granted for this initiative.
Regulation is costly and can have unintended consequences. Other sanctions are available, including:o Procurement policies of Government, Parastatals, Utilities and other state supported organisations.
o Negotiation
o Lobbying by the state, consumer organisations, NGO’s, media etc.
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